The next step is to perform a volatility analysis of the trade. To load the investing dice in your favor, volatility analysis is critical. Most successful traders build their option trades on the volatility analysis. When you are trying to predict the direction of a stock then it is always a 50/50 game. (Unless you have some inside information...) Experts constantly claim that a stock has reached its “Support” or “Resistance” level and will shortly turn in the opposite direction. How many times have you heard these types of “predictions” and then the stock continue in the same direction?

VOLATILITY IS DIFFERENT; IT IS A BETTER PREDICATOR. When a particular stock’s volatility reaches an extreme level for that stock, it is proven to be more likely to reverse itself. This type of pattern in volatility behavior is widely used to determine which stock to analyze and what option strategy to use.

To analyze volatility behavior for the underlying stock, click on the “Technical Analysis Tools” button on the top row. A small window will pop up. (See image below.)

Select “Volatility History Indicator” and you will be allowed to select type of volatilities you want to graph.

VVOOLLAATTIILLIITTYY

As you can see from the image above you can select the type of volatilities (Implied or Statistical) as well as enter the number of days for selected volatilities. For example, you can graph 1-Day Implied Volatility vs. 20-Days Statistical Volatility (set as a default.) You can also change Implied Volatility to Statistical and enter 10 into the box located directly next to it. In this case, you will see a graph of 10-Days Statistical Volatility vs. 20-Days Statistical Volatility. For our analysis, we are going to keep the default settings of 1-Day Implied Volatility vs. 20-Days Statistical. To view this, click on the “Show Graph” button. The Volatility History Graph for AAPL (Apple. Inc.) will then appear on your screen (see image below.)

The above chart has two sections:

• Top section: A chart of historical stock data. • Bottom section: Two Volatility charts

o “1 Day Implied Volatility” o “20 Day Statistical Volatility”

If you look at the “20 Day Statistical Volatility” graph (red line), you will clearly see the pattern we discussed earlier. When volatility grows to an extreme level, it turns in the opposite direction. (Red line on bottom half of graph.)

LET’S LOOK WHERE WE ARE RIGHT NOW. At the bottom of the display, there are numbers highlighted in red and green.

• Green number is the 1-day Implied Volatility. • Red number is the 20-day Statistical (historic) Volatility.

These numbers can be used as guides. You can see that the current levels for both of the volatilities are among the lowest readings for these volatilities. What does this mean? It tells us that the volatilities are reaching their extremes and are getting ready to reverse.

WHAT WILL HAPPEN WITH THE “PROBABILITY OF SUCCESS” AND THE “EXP. P/L” IF VOLATILITY SHRINKS? It will increase both since it will be less probable that the price of the stock will move beyond the breaking point. Conversely, if volatility grows then the Expected P/L and Probability of Success will both shrink.

YYOOUU SSHHOOUULLDD AANNAALLYYZZEE TTHHEE BBEESSTT AANNDD WWOORRSSTT CCAASSEE SSCCEENNAARRIIOO..

BEST CASE SCENARIO: If the volatility continues to shrink, to check what would happen in this case, click on the “Volatility” drop down menu and select “Edit Volatility for Target.” In the textbox to the right, enter 40 (less than current 54.84%.) In order to see the results of what would happen if the volatility drops to 40%, click the “Compute” button. See the below image to review the new calculations.

The “Probability of Profit” increased to 95.45% and “Exp. P/L” to $0.633.

YYOOUU SSHHOOUULLDD AANNAALLYYZZEE TTHHEE BBEESSTT AANNDD WWOORRSSTT CCAASSEE SSCCEENNAARRIIOO..

WORST CASE SCENARIO: If the prediction about the volatility direction is wrong and it will actually grow, then to check this click again on the “Volatility” drop down menu and select “Edit Volatility for Target.” In the textbox to the right, enter 65 (20% greater than current 54.84%) and click on the “Compute” button. See the below image to review the new calculations.

The “Probability of Profit” dropping to 85.07% and “Exp. P/L” to $0.0579. So even if volatility will grow 20% against us to 65%, we still have a pretty good chance to succeed.

As you probably know or at least have seen from this example that “Credit Spreads” are directional trades. You have to be at least modestly on the Bull side of the stock to go with a “Put Credit Spread” and at least modestly on the Bear side of the stock to go with a “Call Credit Spread.”

If we take a look at a historical chart for Apple Inc., we will see that this stock recently went through a serious correction and now we can reasonable assume, either a start recovery process or, because of our volatility prediction, may be moving sideways.

There are numerous newsletters that you can subscribe to; however, never take their advice and put your money on the line without further analysis. Take their recommendations, plug it into PowerAnalyzer and do your

homework. Be sure to analyze all aspects of the trade. Perform the “what-if” analysis and if everything continues to look positive then make the trade.

CCOONNCCLLUUSSIIOONN

Following summary actions to effectively analyze your trade should be conducted before you invest your money:

1. Enter your symbol into the “Symbol” field and click the “Get Data” button.

2. Click on the “Select Your Tools Here” drop down menu and select “Show Strategy on Exp. Date.”

3. Select strategies you want to analyze and click on the “Find Strategy” button.

4. Sort results by “Exp. Rtn.” (default) or “Probability” and find the ones that satisfy your selection criterions. If you did not find any, go back to Step 1. Otherwise click on the first one, it will appear in the Option Matrix and then click on the “Compute” button.

5. Analyze results in the “Price/Profit/Probability” Table or click on the “Profit/Loss Graph” button to see a chart of the results.

6. Click on “Technical Analysis Tools” and select the “Volatility History” graph.

7. Analyze the graph and try to predict where the volatility is heading.

8. Change the “Use Volatility for Target” field and compute again to analyze “Best and Worst” cases scenarios.

9. Change “Target Date” and compute again in order to play “what-if” analysis in order to find out what you can expect during certain days before Expiration.

10. Make your decision with this trade and go to Step 4 to analyze other strategies.

These 10 Steps are the MINIMUM amount of homework that MUST be done in order for you to make a wise decision. As you become more proficient with PowerAnalyzer, it will take you less and less time to complete these 10 Steps.

YOU WILL SEE HOW YOUR TRADING WILL CHANGE. Many PowerAnalyzer clients say their trading became less stressful since they began analyzing all possibilities and were able to anticipate potential surprises in advance. They became more confident in their decisions and trades. Many of them even developed their own successful trading systems as they learned more and more about option trading.

THE LEARNING PROCESS WITH POWERANALYZER IS EASY AND FUN!

TTEECCHHNNIICCAALL AANNAALLYYSSIISS TTOOOOLLSS

The above example used one of the Technical Analysis Tools – the volatility chart. In reality there are a number of technical analysis tools that are available through PowerAnalyzer. If you have a stock’s data loaded then you can click on the “Technical Analysis Tools” button (top right) and a small window appears with a drop down menu. Click on the down arrow and you will see all the different choices. If you click on one of those choices, you will be offered further choices on how you want to plot the technical indicator you’ve selected. After you have made all of your selections, click on “Show Graph.”

A brief description follows each one of the indicators listed below. Note: Each plot also includes a chart of the underlying stock. The plot you request is generally shown below the price chart (except for moving averages and Bollinger Bands, which are drawn on the price chart. In those two cases the stock’s volume history is shown beneath the price chart).

VOLATILITY RATIO – Plot a ratio of statistical vs. implied volatility, using the number of days of your choice. For example, you might want to plot 1-day Implied vs. 20-day Historical.

VOLATILITY HISTORY – As shown above, plot a graph of the volatility history of any two volatilities you want.

MOVING AVERAGE – Plot any two moving averages on the graph of the stock. The stock’s volume is shown also.

STOCHASTIC OSCILLATOR – Plot any two stochastic oscillators.

PRICE OSCILLATOR – Plot the ratio of any two simple or exponential moving averages.

PRICE RATE OF CHANGE – Plot the rate of change of a stock, over a user-selected time period.

BOLLINGER BANDS – Plot the Bollinger Bands on a graph of the stock. Stock volume is shown below the price chart.